The Tax Treatment of Employee Stock-Options

Employee stock-option schemes are growing in importance across the OECD and this raises a number of issues for both domestic and international tax policy. In view of this, the OECD's Committee on Fiscal Affairs is undertaking work on the treatment of stock-options under tax treaties, the domestic treatment of stock-option schemes and the transfer pricing implications of stock-option schemes.

Tax Treaties

A number of tax treaty issues arise in considering employee stock-options:

Timing mismatches for employment benefits.

Determining to which service an option relates.

Distinguishing employment income from capital income.

Multiple residence taxation.

Alienation of stock-options.

Differences in valuation between markets.

Work on these issues is well advanced, and a discussion draft that describes these issues and proposes possible interpretations and solutions in the context of the OECD Model Tax Convention is now available for public comment ( see: Cross-Border Income Tax Issues Arising from Employee Stock-Options Plans - A Public Discussion Draft ). Please note that upon request from persons wishing to provide comments on this draft, the original deadline for comments, which was 31 July 2002, has been postponed to 31 October 2002.

Domestic Tax Treatment

Work in this area is intended to provide information and analysis to assist countries in reaching their own policy decisions. The analysis focuses on three areas:

Description of current tax treatment of employee stock-option schemes in OECD countries.

Analysis of what form of tax treatment would provide neutrality in comparison to wages.

Identification and discussion of arguments that are advanced in favour of and against taxing employee stock-options differently from wages.

This work is ongoing. However, it is already clear that there are wide differences between OECD countries in the way that employee stock-options are taxed. Also, a number of OECD countries have more than one tax treatment of employee stock-option schemes, depending on the precise nature of the schemes.

Transfer Pricing Issues

This area of work analyses the implications of employee stock-options for inter-company transactions and the arm's lenght principle. Issues include:

Should the issuing company charge the employer (if different) for the stock-options?